The South African economy shrank an annualized 1.2% over Q1 of 2016, compared to a 0.4% growth in the previous quarter and worse than market expectations of 0.1% drop, dragged down by mining and quarrying and transport sectors.

In mid-May, the South African Reserve Bank (SARB) took a break in the rate hike cycle but openly admitted its dilemma between a weak real economy and high inflation levels.

Since then the situation for the SARB has not improved. In Q1 real GDP contracted by 0.3% QoQ, which leads to concerns that the economy might not do more than stagnate over the year as a whole.

Today the central bank might have to take the next hit, as the data on consumer prices in May is on the agenda. Bloomberg consensus expects a rise of 0.4% mom. That may turn out to be a little too low. But even if 0.4% turned out to be correct the total rate would rise to 6.4% YoY, thus moving further away from the SARB’s target range (3%-6%). That means the central bank’s dilemma might increase.

And as much as the SARB would like to support the economy, a further increase in price pressure makes SARB rate hikes more likely. The latter would constitute a stabilising factor for the South African Rand. However, the last months have demonstrated that the main driver for the South African Rand is still global risk awareness.

The SARB is unable to change that with its stability-orientated monetary policy. However, it would constitute a further risk factor for the South African Rand if the central bank’s monetary policy were to ignore inflation.

Technically, USD/ZAR is currently trading around 14.6878 levels (dropped from 15.5426 levels since 14th of this month). Intraday bias remains clearly bearish till the time leading indicators signals intensified selling momentum. The current prices have slid well below DMAs with 7DMA crossing below 21DMA.

We had recommended Credit Call Spread on 14th, please follow below weblink for more reading on our previous write up:

http://www.econotimes.com/FxWirePro-Driving-forces-of-BRICS-currencies-and-hedging-perspectives-Part-2-221552

By now the short side of the strategy has been performing very well so far with 4 trading days to spare, longs of 2m tenor would take care of upside risks in a long run.

We’ve been firm to maintain our previous FX option portfolio on this pair, well, the strategy reads this way, long in USDZAR 2M OTM delta call while shorting 2W ATM call with positive thetas for time decay advantage on shorter tenors on the short side.